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A Trader's Guide to Term Structure Methods


Objective: a 3 day course that focuses on the modelling of interest rate evolution in time and its use in valuing derivatives based on interest rates, including simpler products such as bonds, bond options and caps/floors.

        focuses on easy conceptualisation of interest rate processes and their movement in time

      examines in depth the building of yield curves and underlying dynamics

        examines modeling of products based on yield curves

        uses thoroughly worked examples to demonstrate concepts and results

Will learn: to answer questions like:

        how are yield curve dynamics simulated

        how are derivatives priced with stochastic term structures

        what are the strengths and weaknesses of comparative models such as BDT, HJM, Hull-White etc.

Audience: market professionals with at least 1-year of experience

        Traders, sales, support,

        Management, treasurers,

        Risk Management

Table of Contents

1)      Overview: consider the basics of arbitrage valuation and stochastic processes

2)      Yield Curve Dynamics: introduction to common modeling approaches for both static and dynamic views of curves including market convention and spline curve generation, Principal Component Analyses, and reality impact considerations for usage, as well as relationship to term-structure models

3)      Valuation Basics (parts 1 and 2) : modeling of price and yield processes under uncertainty including comprehensive development of modern stochastic methods as applied to the real world and in terms trader's will understand.  The development is then expanded to illustrate the basics of term structure modelling under uncertainty with a first glance at 1-factor and 2-factor models, with a lucid derivation of HJM.  Analytical, tree, and Monte Carlo methods are introduced.

4)      1-Factor Models: Examination and analyses of common 1-factor (both no-arbitrage and equilibrium based) models including BS, Ho-Lee, Vasicek, CIR, BDT, BK, Hull-White.  The models are explained as well as compared to one another in a workshop to illustrate the "valuation implications" of one model vs. another.

5)      2-Factor Models: Introduction to traditional 2-factor models and illustrated via MC simulation based methods including a Generic 2-factor model, and Brennan-Schwarz.

6)    Calibration: introduction to the ideas and "philosophies" of calibration, illustration of calibration for 1-factor BDT tree approach, for 1-factor Hull-White by MLE an method, illustration of calibration of a 2-factor model by Newton's method.  Importantly also includes analyses and implication of calibration in terms of P&L.

6)      Advanced Modeling Techniques: includes a range of issues on the implication of statistical properties of curves and curve histories, consideration of the benefits of 1-, 2-, 3, or n-factors etc.

7)   Position and Portfolio Simulation: Term structure models applied to entire portfolios of derivatives with both back-testing and forward-testing including step by illustration of bond, swap, futures, and options based positions with detailed examination of the impact of different term-structure assumptions.


740 Pages of comprehensive and extensively illustrated Handout Notes (see samples here)

Plus copies of relevant TG2 Books/e-Books

Note: Seminars can be tailored to your trading, risk, client, and systems needs.  Submit your needs, and/or "cut/paste" from other Seminars (see entire "standard" list HERE)

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Last modified: July 25, 2011